Chapter 1 – A Framework for Financial Accounting
Defining Accounting
• Accounting is the language of business
o A system for maintaining records of a company’s operations & communicating that info to
decision-makers (internal and external)
o A central part of a company’s management information system
• Financial Accounting measures the business activities of a company in monetary terms & communicates
these measurements to external parties for decision-making purposes
o Summarised information only
o General Purpose Financial Statements (generic)
Entity Types that Generate FA Information
• Company Structure *examinable
o Private Limited (Pte Ltd) – most common entity type in Singapore
o Limited (by shares) – a public company (+/- SGX listing)
o Limited (by guarantee)
o Board of Directors, CEO, Company Secretary (+/- CFO, COO depending on size)
o Owners (shareholders) and management are often separate
o Companies that issue shares of stock often form corporations; company is a separate legal
entity from its owners (company can sue & be sued), i.e. owners have limited liability (can lose
investment but not but not personal assets if company fails)
o Sue up to the value of the share capital and retained earnings
o Greater compliance costs; has a constitution and more highly regulated
o External audit required; must keep financial information
o At least 1 individual/corporate entity shareholder, 1 resident director (SC/PR/EP), 1 company
secretary (SC), min. $1 initial paid-up share capital, physical office in Singapore
Key Users of FA Information
• People make decisions about companies based on available financial information
• FA information is also used internally, for instance the availability of surplus cash will influence how
much bonus the company can afford to pay its employees
• E.g. The Board of Directors needs to know how the company has performed financially during Covid-19
Business Activities
• Cash Flow Items
o Financing Activities – transactions the company has with investors & creditors, such as issuing
stock and borrowing money from a local bank
o Investing Activities – transactions involving purchase & sale of resources that are expected
benefit the company for > 1 year
o Operating Activities – include transactions relating to the primary operations of the company,
such as providing products & services to customers and the associated costs of doing so, like
rent, salaries, utilities, taxes, and advertising *research & development costs
• Balance Sheet Items
o Assets – total resources of a company; current & non-current; tangible & intangible
o Liabilities – amounts owed to creditors; current & non-current
o Owner’s Equity – represents the owners’ claim to resources
, § Stockholder’s Equity = Total Assets - Total Liabilities
• Income Statement Items
o Revenue – amounts gained when company sells products or services to customers
o Expenses – cost of providing products & services; other business activities
o Net Income – difference between revenue & expenses; expense > revenue = net loss
§ Revenue - Expenses = Net Income
§ +ve Net Income = OE (Owner/Stockholder’s Equity)
§ Can be known as Earnings, Profit, EBIT (Earnings before Interests & Taxes)
Financial Statements
• Income Statement – aka Statement of Profit or Loss (P&L), Statement of Financial Performance (SFPe),
Statement of Comprehensive Income
o Accrual Basis – revenue or expenses are recorded when a transaction occurs rather than when
payment is received or made
o Covers a period of time, e.g. one year (For the period ending DD Month YYYY)
o P&L accounts are temporary; closed off at end of period, new period opening balance = 0
• Balance Sheet – aka Statement of Financial Position (SFPo)
o Accrual Basis
o Snapshot of a company at a point in time (As at DD Month YYYY)
o Balance Sheet accounts are permanent; perpetual as in rolled over at the end of period, new
period opening balance = closing balance of prior period
• Statement of Stockholder’s Equity – aka Statement of Changes in Equity
o Accrual Basis
o Covers a period of time (For the period ending DD Month YYYY)
o Common Stock (external source) v Retained Earnings (internal source)
§ Stockholder’s Equity = Common Stock + Retained Earnings
§ Retained Earnings = All Net Income - All Dividends
= R - E - Dividends Paid
• Statement of Cash Flows
o Cash Basis – recognizes revenues & expenses at the time cash is received or paid out
o Covers a period of time (For the period ending DD Month YYYY)
§ Change in Cash = Operating + Investing + Financing Cash Flows
*A complete set of financial statements includes notes to the accounts and comparative information
Definitions – SFRS (1) Glossary & CF
• Expense: decrease in assets/increase in liabilities, that result in decreases in equity, other than those
relating to distributions to holders of equity claims (dividends?) – NO future benefit
o Debit = Increase; Credit = Decrease
• Income: increases in assets/decreases in liabilities, that result in decreases in equity, other than those
relating to contributions from holders of equity claims (IOU)
o Debit = Decrease; Credit = Increase
o Revenue: Income from the course of an entity’s ordinary activities, i.e. sales, fees, turnover
• Asset: a present economic resource controlled by the entity as a result of past events – HAS future
benefit
o Debit = Increase; Credit = Decrease
, • Liability: a present obligation of the entity to transfer an economic resource as a result of past events
o Debit = Decrease; Credit = Increase
• Owners’ Equity: the residual interest in the assets of the entity after deducting all its liabilities
o Debit = Decrease; Credit = Increase
Textbook Terms
• Deferred Revenue = Revenue in Advance = Contract Liability
• Sales Tax Payable = GST Payable in SG
• FICA Tax Payable = CPF Payable in SG
• Revenue = Income = Proceeds = Takings = Turnover
• Common Stock = Share Capital = Ordinary Shares
General Purpose Financial Reports – SFRS (1) CF
• Objective: Provide financial information about a ‘reporting entity’ that is useful to existing & potential
investors, lenders & other creditors in making decisions relating to providing resources to the entity
• For whom? Intended to meet the needs of users who are not in a position to require an entity to prepare
reports tailored to their particular information needs
• How often? Minimally annually (in accordance with the Companies Act); half-yearly for SGX companies
• Accrual Basis: Matches revenues with expenses from same period; revenues, expenses, assets,
liabilities and owner’s equity recorded when they occur, not when they are paid
• Perspective: Viewed from the perspective of the entity as a whole, not from any specific users’
viewpoint
• Going concern assumption: Can pay debts as and when they fall due; exists in perpetuity (at least for
the foreseeable future > 12 months); implies that entity has neither the intention nor need to liquidate
or curtail materially its scale of operations
Conceptual Framework
• Like a blueprint/standard operating procedure (not an accounting standard itself)
• Purpose of the CF:
o Assists standard setters to develop accounting standards based on consistent concepts
o Assists preparers to develop consistent accounting policies
o Guides preparers when an accounting standard allows choice
o Assists all parties, including users, to interpret the accounting standards
, Fundamental Qualitative Characteristics
• Relevance – information is relevant if it is capable of making a difference to the decisions made by users
o Predictive value: can be used as an input to help users predict future outcomes; and/or
o Confirmatory value: confirms or changes previous evaluations
o Materiality: information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of GPFR make
• Faithful Representation – information must faithfully represent the substance of what it appears to
represent
o Complete: all information necessary for a user to understand the phenomenon being
reported; monetary plus textual information (narrative in the notes)
o Neutral: no bias in the selection & presentation of financial information; not slanted, weighted,
emphasized/de-emphasized or manipulated; supported by the application of prudence
o Free from error: does not mean accurate in all respects; no errors/omissions in description;
process used to produce reported information has been selected and applied with no errors
o Prudence: exercise of caution under conditions of uncertainty, does not allow overstatement
or understatement of assets, liabilities, income or expenses; supports neutrality
o Measurement uncertainty: arises when monetary amounts cannot be observed directly and
need to be estimated, does not prevent information from being useful, might affect whether
a sufficiently faithful representation can be achieved if too high
o Substance over form: economic substance of underlying phenomenon is usually the same as
the legal form, otherwise, we need to represent the substance to provide faithful
representation.
Enhancing Qualitative Characteristics
• Comparability
o Refers to the ability of users to see similarities & differences in the same company over time
o Useful if it can be compared with similar information about other entities
o Useful if it can be compared with similar information from the same entity over time
o Consistency is similar, but the difference is that comparability is the goal while consistency
helps to achieve that goal
• Verifiability
o Implies a consensus among different measurers
o Direct or indirect observation
o Describe the underlying assumption; paper trail/audit trail
• Timeliness
o Refers to information being available to users early enough to allow them to use it in the
decision process
o Already historical information when reported (based on past events)
o Takes time to prepare & verify; generally the older the information, the less useful it is
• Understandability
o Refers to users being able to understand the information within the context of the decision
they are making
o Clear & concise reporting enhances understandability; assumed users of GPFR have
reasonable knowledge, and apply this knowledge diligently and with skepticism
Defining Accounting
• Accounting is the language of business
o A system for maintaining records of a company’s operations & communicating that info to
decision-makers (internal and external)
o A central part of a company’s management information system
• Financial Accounting measures the business activities of a company in monetary terms & communicates
these measurements to external parties for decision-making purposes
o Summarised information only
o General Purpose Financial Statements (generic)
Entity Types that Generate FA Information
• Company Structure *examinable
o Private Limited (Pte Ltd) – most common entity type in Singapore
o Limited (by shares) – a public company (+/- SGX listing)
o Limited (by guarantee)
o Board of Directors, CEO, Company Secretary (+/- CFO, COO depending on size)
o Owners (shareholders) and management are often separate
o Companies that issue shares of stock often form corporations; company is a separate legal
entity from its owners (company can sue & be sued), i.e. owners have limited liability (can lose
investment but not but not personal assets if company fails)
o Sue up to the value of the share capital and retained earnings
o Greater compliance costs; has a constitution and more highly regulated
o External audit required; must keep financial information
o At least 1 individual/corporate entity shareholder, 1 resident director (SC/PR/EP), 1 company
secretary (SC), min. $1 initial paid-up share capital, physical office in Singapore
Key Users of FA Information
• People make decisions about companies based on available financial information
• FA information is also used internally, for instance the availability of surplus cash will influence how
much bonus the company can afford to pay its employees
• E.g. The Board of Directors needs to know how the company has performed financially during Covid-19
Business Activities
• Cash Flow Items
o Financing Activities – transactions the company has with investors & creditors, such as issuing
stock and borrowing money from a local bank
o Investing Activities – transactions involving purchase & sale of resources that are expected
benefit the company for > 1 year
o Operating Activities – include transactions relating to the primary operations of the company,
such as providing products & services to customers and the associated costs of doing so, like
rent, salaries, utilities, taxes, and advertising *research & development costs
• Balance Sheet Items
o Assets – total resources of a company; current & non-current; tangible & intangible
o Liabilities – amounts owed to creditors; current & non-current
o Owner’s Equity – represents the owners’ claim to resources
, § Stockholder’s Equity = Total Assets - Total Liabilities
• Income Statement Items
o Revenue – amounts gained when company sells products or services to customers
o Expenses – cost of providing products & services; other business activities
o Net Income – difference between revenue & expenses; expense > revenue = net loss
§ Revenue - Expenses = Net Income
§ +ve Net Income = OE (Owner/Stockholder’s Equity)
§ Can be known as Earnings, Profit, EBIT (Earnings before Interests & Taxes)
Financial Statements
• Income Statement – aka Statement of Profit or Loss (P&L), Statement of Financial Performance (SFPe),
Statement of Comprehensive Income
o Accrual Basis – revenue or expenses are recorded when a transaction occurs rather than when
payment is received or made
o Covers a period of time, e.g. one year (For the period ending DD Month YYYY)
o P&L accounts are temporary; closed off at end of period, new period opening balance = 0
• Balance Sheet – aka Statement of Financial Position (SFPo)
o Accrual Basis
o Snapshot of a company at a point in time (As at DD Month YYYY)
o Balance Sheet accounts are permanent; perpetual as in rolled over at the end of period, new
period opening balance = closing balance of prior period
• Statement of Stockholder’s Equity – aka Statement of Changes in Equity
o Accrual Basis
o Covers a period of time (For the period ending DD Month YYYY)
o Common Stock (external source) v Retained Earnings (internal source)
§ Stockholder’s Equity = Common Stock + Retained Earnings
§ Retained Earnings = All Net Income - All Dividends
= R - E - Dividends Paid
• Statement of Cash Flows
o Cash Basis – recognizes revenues & expenses at the time cash is received or paid out
o Covers a period of time (For the period ending DD Month YYYY)
§ Change in Cash = Operating + Investing + Financing Cash Flows
*A complete set of financial statements includes notes to the accounts and comparative information
Definitions – SFRS (1) Glossary & CF
• Expense: decrease in assets/increase in liabilities, that result in decreases in equity, other than those
relating to distributions to holders of equity claims (dividends?) – NO future benefit
o Debit = Increase; Credit = Decrease
• Income: increases in assets/decreases in liabilities, that result in decreases in equity, other than those
relating to contributions from holders of equity claims (IOU)
o Debit = Decrease; Credit = Increase
o Revenue: Income from the course of an entity’s ordinary activities, i.e. sales, fees, turnover
• Asset: a present economic resource controlled by the entity as a result of past events – HAS future
benefit
o Debit = Increase; Credit = Decrease
, • Liability: a present obligation of the entity to transfer an economic resource as a result of past events
o Debit = Decrease; Credit = Increase
• Owners’ Equity: the residual interest in the assets of the entity after deducting all its liabilities
o Debit = Decrease; Credit = Increase
Textbook Terms
• Deferred Revenue = Revenue in Advance = Contract Liability
• Sales Tax Payable = GST Payable in SG
• FICA Tax Payable = CPF Payable in SG
• Revenue = Income = Proceeds = Takings = Turnover
• Common Stock = Share Capital = Ordinary Shares
General Purpose Financial Reports – SFRS (1) CF
• Objective: Provide financial information about a ‘reporting entity’ that is useful to existing & potential
investors, lenders & other creditors in making decisions relating to providing resources to the entity
• For whom? Intended to meet the needs of users who are not in a position to require an entity to prepare
reports tailored to their particular information needs
• How often? Minimally annually (in accordance with the Companies Act); half-yearly for SGX companies
• Accrual Basis: Matches revenues with expenses from same period; revenues, expenses, assets,
liabilities and owner’s equity recorded when they occur, not when they are paid
• Perspective: Viewed from the perspective of the entity as a whole, not from any specific users’
viewpoint
• Going concern assumption: Can pay debts as and when they fall due; exists in perpetuity (at least for
the foreseeable future > 12 months); implies that entity has neither the intention nor need to liquidate
or curtail materially its scale of operations
Conceptual Framework
• Like a blueprint/standard operating procedure (not an accounting standard itself)
• Purpose of the CF:
o Assists standard setters to develop accounting standards based on consistent concepts
o Assists preparers to develop consistent accounting policies
o Guides preparers when an accounting standard allows choice
o Assists all parties, including users, to interpret the accounting standards
, Fundamental Qualitative Characteristics
• Relevance – information is relevant if it is capable of making a difference to the decisions made by users
o Predictive value: can be used as an input to help users predict future outcomes; and/or
o Confirmatory value: confirms or changes previous evaluations
o Materiality: information is material if omitting, misstating or obscuring it could reasonably be
expected to influence decisions that the primary users of GPFR make
• Faithful Representation – information must faithfully represent the substance of what it appears to
represent
o Complete: all information necessary for a user to understand the phenomenon being
reported; monetary plus textual information (narrative in the notes)
o Neutral: no bias in the selection & presentation of financial information; not slanted, weighted,
emphasized/de-emphasized or manipulated; supported by the application of prudence
o Free from error: does not mean accurate in all respects; no errors/omissions in description;
process used to produce reported information has been selected and applied with no errors
o Prudence: exercise of caution under conditions of uncertainty, does not allow overstatement
or understatement of assets, liabilities, income or expenses; supports neutrality
o Measurement uncertainty: arises when monetary amounts cannot be observed directly and
need to be estimated, does not prevent information from being useful, might affect whether
a sufficiently faithful representation can be achieved if too high
o Substance over form: economic substance of underlying phenomenon is usually the same as
the legal form, otherwise, we need to represent the substance to provide faithful
representation.
Enhancing Qualitative Characteristics
• Comparability
o Refers to the ability of users to see similarities & differences in the same company over time
o Useful if it can be compared with similar information about other entities
o Useful if it can be compared with similar information from the same entity over time
o Consistency is similar, but the difference is that comparability is the goal while consistency
helps to achieve that goal
• Verifiability
o Implies a consensus among different measurers
o Direct or indirect observation
o Describe the underlying assumption; paper trail/audit trail
• Timeliness
o Refers to information being available to users early enough to allow them to use it in the
decision process
o Already historical information when reported (based on past events)
o Takes time to prepare & verify; generally the older the information, the less useful it is
• Understandability
o Refers to users being able to understand the information within the context of the decision
they are making
o Clear & concise reporting enhances understandability; assumed users of GPFR have
reasonable knowledge, and apply this knowledge diligently and with skepticism
